Published on November 7, 2008
beyond Make it real! budgeting > transformation network. Beyond Budgeting in Practice. Why an ever-changing world requires a new and different management model. And how you can make it happen. Niels Pflaeging BBTN & MetaManagement Group Keynote at Excellence Conference, Tehran/Iran 27.07.2008
“faale ghah-ve“ – Tehran/Iran Excellence Conference 2 © BBTN – All rights reserved
The world has changed: outlining today's critical success factors high Industrial age ends: Knowledge economy advances: ”Supplies have the power“, ”Customers have the power“, Evolution of mass markets: strong competition, individualized demand: Taylorism as the superior model decentralized and adaptive model is superior! All are important today! Competitive Characteristics success factors (CSF) Dynamics and 1. Discontinuous change - Fast response complexity 2. Short life cycles - Innovation 3. Constant pressure on prices Operational excellence - Characteristics 4. Less loyal customers - Customer intimacy • Incremental change 5. Choosy employees - Great place to work • Long life cycles 6. Transparency, - Effective • Stable prices pressure from society governance • Loyal customers High financial - Sustained superior • Choosy employers expectations value creation/fin.perf. low • „Managed“ results 1890 Most organizations still use a management model 2010 was designed 2030 1980 1990 2000 that 2020 for efficiency, while the problem today is complexity. Excellence Conference – Tehran/Iran 3 © BBTN – All rights reserved
Excellence Conference – Tehran/Iran 4 © BBTN – All rights reserved
Excellence Conference – Tehran/Iran 5 © BBTN – All rights reserved
What is it that these organizations have in common? Exceptional companies that do almost everything differently! Industry, Airline, Technology, Engin. Services, USA USA USA Brazil Retail, Services, Sweden Switzerland • Innovators: A crises within their industries Banking, or firms caused them to change radically Services, Sweden Australia • Exoten: Exceptional leadership models • Performer: Superior competetive success Industry, It´s the coherence of the Industry, USA leadership model that matters! Japan Retail, Retail, Sweden Germany Energy, Industry, Services, Retail, USA USA Brazil Germany Excellence Conference – Tehran/Iran 7 © BBTN – All rights reserved
Our journey since 1998, within the international Beyond Budgeting movement Beyond budgeting (1998-2002) Beyond command and control (2003-2007) Beyond incremental change (2008-) … Excellence Conference – Tehran/Iran 6 © BBTN – All rights reserved
A new brand. A new network. Make it real! The first “open source“ movement in the management arena - worldwide! Excellence Conference – Tehran/Iran 8 © BBTN – All rights reserved
The new model is supported by science and practice Sciences: Practice: Thought leaders • • Stafford Beer Margareth Wheatley Industry leaders (selected) • Niklas Luhmann (selected) • Kevin Kelly • Ross Ashby • Joseph Bragdon • … • Douglas McGregor • Chris Argyris Complexity • Jeffrey Pfeffer theories Manufacturing • Reinhard Sprenger • Stephen Covey • Howard Gardner Social • Viktor Frankl sciences & HR Distribution • … • Peter Drucker Leadership & • Tom Peters Services • Charles Handy Change • John Kotter • Peter Senge Strategy & • Thomas Davenport Government performance & Not-for profit • Peter Block • … management • Charles Horngren • Henry Mintzberg • Gary Hamel • Jeremy Hope • Michael Hammer • Thomas Johnson • … Excellence Conference – Tehran/Iran 9 © BBTN – All rights reserved
Excellence Conference – Tehran/Iran 10 © BBTN – All rights reserved
Excellence Conference – Tehran/Iran 11 © BBTN – All rights reserved
Outlining the ‘industrial age’ model and its pitfalls “command and control“ • Too centralized • Too inward-looking • Too little customer-oriented • Too bureaucratic • Too much focused on control • Too functionally divided • Too slow and time-consuming • Too de-motivating • … film ‘Modern Times’ with Charlie Chaplin, 1936 From the Excellence Conference – Tehran/Iran 12 © BBTN – All rights reserved
How markets govern organizations “from the outside in” Periphery Mar ke t Center Information Decision Command Centralist command and Impulse control “collapses“ in Reaction increasingly complex environments Source: Gerhard Wohland Excellence Conference – Tehran/Iran 13 © BBTN – All rights reserved
From hierarchy to network structure. Traditional model New model (centralized functional hierarchy) (decentralized leadership network) Changing leadership and structure • “Bosses” rule! • “The market” rules! • Top-down • Outside-in command and control sense and respond • Top management • Front-line teams are always is always in charge in charge • Centralized leadership • Devolved leadership Excellence Conference – Tehran/Iran 14 © BBTN – All rights reserved
Why most concepts, books and theories about leadership, as well as most advice on management are flawed “One cannot talk sensibly about leadership or people management, nor design decent management processes, unless we clarify beforehand our beliefs with regards to what in organizations are like. We have to develop a shared understanding of human nature and its influence on our organizations.” Leading with Flexible Targets Excellence Conference – Tehran/Iran 15 © BBTN – All rights reserved
vs. Douglas McGregor Excellence Conference – Tehran/Iran 16 16 © BBTN – All rights reserved
The industrial age management model not only fails because markets have changed. It is also misaligned with human nature. Theory X (0%) Theory Y (100%) Attitude – Attitude - People need to work and want to People dislike work, find it boring, and will take an interest in it. Under the right avoid it if they can. conditions, they can enjoy it. Direction – Direction – People must be forced or bribed to make the People will direct themselves towards a right effort. target that they accept. Responsibility – Responsibility – People would rather be directed than accept People will seek and accept responsibility, responsibility, which they avoid. under the right conditions. Motivation – Motivation - Under the right conditions, People are motivated mainly by money and people are motivated by the desire to realize fears about their job security. their own potential. Creativity – Most people have little creativity Creativity – - except when it comes to getting round Creativity and ingenuity are widely distributed management rules. and grossly underused. Based on Douglas McGregor, ‘The Human Side of Enterprise’, 1960 Excellence Conference – Tehran/Iran 17 © BBTN – All rights reserved
W.L.Gore. The best-led “innovation machine“ in the world? • Consistently successful, for more than 40 years • “Most innovative company in the U.S.“ (Fast Company) • For the 8th year in a row among the 100 best employers in the U.S. (“Fortune“ – best medium-sized employer). Best employer in England for the third consecutive year. Among the best companies to work for in the EU and Germany. • All employees participate in the firm´s success and become “virtual“ shareholders. • No job titles. Little hierarchy. No job descriptions - instead: “job sculpting“. • Highly empowered teams. “Temporary leadership“ • “Since 1958, Gore has avoided traditional hierarchy. Instead, we have practiced a team-based environment that stimulates personal initiative, innovation and communcation between all our Associates.” • “The fundamental belief in the people in our organzation and in their ability continues to be the key to our success.“ Excellence Conference – Tehran/Iran 18 © BBTN – All rights reserved
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The 12 principles of the Beyond Budgeting model are in fact a full set of “design principles“ for the new organization type. Principles Do this! Not that! Customers and Customer/outside focus Focus on the boss responsibility Responsible teams (“cells”) Centralization Leadership Performance and Performance culture Inspired by the past 6 devolved freedom Autonomy and responsibility Adherence to fixed plans leadership principles Governance and Clearly defined objectives and values Impose objectives transparency Open and shared information Restrict information Goals and Goals related to continual improvement Fiscal year fixed goals rewards Rewards related to company results Reward local fixed goals Processes Planning and 6 adaptive management down annual planning Continuous and inclusive planning Top controls process principles Variations against fixed plans Compare performance against actuals Resources and Resources on demand Annual budget allocations coordination Coordinate dynamic interactions Departmentalization Excellence Conference – Tehran/Iran 20 © BBTN – All rights reserved
From the old coherence to a new coherence. Traditional model (supports efficiency) New model (supports complexity) Centralized Decentralized hierarchy, network, “command “sense and control“ and respond“ The old model is not aligned with today’s CSF and it does not support ‘Theory Y’. > We need a new Relative strategy model to cope with performance complexity contracts > We must change Fixed the whole model! performance Dynamic contracts coordination Fixed Dynamic processes processes control Excellence Conference – Tehran/Iran 21 © BBTN – All rights reserved
There are many outstanding cases of companies that have applied the “new” model. This is a selection. 22 22 Excellence Conference – Tehran/Iran 22 © BBTN – All rights reserved
The case of a radically decentralized organization: Handelsbanken – an extraordinary leadership philosophy The most important objective within Handelsbanken Group: “Higher Return on Equity than the average of comparable banks in the Nordic region and Europe.” Made real through: • Radical decentralization, which in turn leads to… • Best customer service Alexander V Dokukin • Lowest cost Consistently – over a period of 30 years – one of the most successful banks in Europe, measured by almost all key performance indicators (e.g. ROE, TSR, EPS, Cost/Income, customer satisfaction, …) ROE = Return on Equity, TSR = Total Shareholder Return, EPS = Earnings per share Excellence Conference – Tehran/Iran 23 © BBTN – All rights reserved
How “radical decentralization“ is being reflected in the company´s organizational structure and decision-making Principles Customers Customer intimacy A large network of self-managed teams with full responsibility for 600 branch managers (Profit Centers) customer results Freedom and capability to act 12 regional Fast, open “Winning“ culture, combined with the managers Fast, open (Invest Centers) information information freedom and ability to act systems systems Governance and transparency CEO, Framework for decision making with product firms, clear values, limits and relative treasury, IT etc. targets, plus transparency Leads to maximum customer satisfaction! Source: BBRT Excellence Conference – Tehran/Iran 24 © BBTN – All rights reserved
Relative target definition through “league tables“ (rankings) – instead of planned, fixed targets and internal negotiation Strategic „cascade” Bank to bank Bank to bank Return on Equity (RoE) Return on Equity (RoE) Region to region Principles Region to region Return on Assets(RoA)etc. 1. Bank D 31% Return on Assets(RoA)etc. 1. Bank D 31% Branch to branch 2. Bank JJ 24%1. 2. Bank Branch to branch 24%1. Region A 38% Cost/income ratio etc. Region A 38% Cost/income ratio etc. 3. Bank I I 20%2. 3. Bank 20%2. Region CC 27% Relative targets and Region 27% relative compensation 4. Bank BB 18%3. 4. Bank Region H 20%1. Branch JJ 28% 18%3. Region H 20%1. Branch 28% 5. Bank EE 15%4. 5. Bank 15%4. Region B 17%2. Region B 17%2. Branch D 32% Branch D 32% Continuous 6. Bank FF 13%5. 6. Bank 13%5. Region FF 15% 3. Region 15%3. Branch EE 37% Branch 37% 7. Bank CC 12%6. Region EE 12%4. 12%4. Branch A 39% Branch A 39% planning/control 7. Bank 12%6. Region 8. Bank H 10%7. Region JJ 10%5. 10%5. Branch I I 41% Branch 41% 8. Bank H 10%7. Region 9. Bank GG 8% 8. 9. Bank 8% 8. Region I I 7% 6. 7% 6. Branch FF 45% Region Branch 45% “On demand“ flow of 9. Region G 6% 7. Region G 6% 7. Branch CC 54% 10. Bank AA (2%)9. 10. Bank (2%) Branch 54% resources/ 10. Region D (5%)8. 10. Region D (5%)8. Branch G 65% Branch G 65% dynamic coordination 9. 9. Branch H 72% Branch H 72% 10. Branch B 87% 10. Branch B 87% Result & value contribution Leads to lowest operational cost! Excellence Conference – Tehran/Iran 25 © BBTN – All rights reserved
Flexible coordination and resources “on demand“ - instead of allocations and budgets Headquarters/ Headquarters/ Region Region Branches acquire resources through internal markets Resources Resources Customer Customer Branch Branch (IT, HR etc.) (IT, HR etc.) demand demand Branches Branches alone are Branches decide over responsible for efficient observe necessary use of resources customer resource levels demand Leads to eradicating and avoiding waste! Source: BBRT Excellence Conference – Tehran/Iran 26 © BBTN – All rights reserved
From fixed to adaptive management processes. Traditional model New model (fixed performance contracts, (relative performance contracts, negotiated in advance) assessed with hindsight) Relative strategy performance contracts Changing Fixed performance processes Dynamic contracts coordination control • Fixed, annual processes • Dynamic, continuous processes • Fixed targets and incentives • Relative targets/compensation • Centralized and • Self-control, transparency and bureaucratic control peer pressure Excellence Conference – Tehran/Iran 27 © BBTN – All rights reserved
Traditional management processes keep teams from strategic thinking, and motivate counterproductive or unethical behavior Financial problems • Process takes too long Vision • Plans become obsolete quickly • Plans are of little or no use Targets and strategic guidelines Strategic problems Profitability in petrochemical industry in Europe 600 500 • Target negotiation 400 Fixed • Definition of incentives 300 Fixed • Activity planning 200 performance performance • Resource allocation 100 contacts and contacts and • Coordination of plans 0 0 1984 1986 1988 1990 1992 1994 1996 1998 2000 Source: Chem Systems “keep on track” “keep on track” • Approval Behavioral problems Budget Performance control (plan-actual) Bonus (vs. targets) Source: BBRT ... Excellence Conference – Tehran/Iran 28 © BBTN – All rights reserved
Management processes in organizations are “straight jackets” Strategy “Fixed” performance contract Strategic • Period [Fixed] learning cycle • Targets [Fixed] • Compensation [Fixed] Annual plan Fixed • Plan [Fixed] Performance Contract • Resources [Fixed] Budget • Coordination [Fixed] • Controlle [Fixed] Management • Agreed through [Negotiation] control cycle • Signed by: [Manager/Director] Control Tayloristic management works like this: As centralistic-burocratic hierarchies, held together through a regime of fixed performance contracts! ExcellenceBBRT Source: Conference – Tehran/Iran 29 29 © BBTN – All rights reserved
Organizations need a different, trust-based form of “future-directed thinking”, NOT excessive planning! “The secret of success is not to foresee the future. But to build an organization that is able to prosper in any of the unforeseeable futures.quot; Michael Hammer Excellence Conference – Tehran/Iran 30 © BBTN – All rights reserved
Excellence Conference – Tehran/Iran 31 © BBTN – All rights reserved
Why traditional management with “fixed performance contracts“ regularily fools us: We have lost control a long time ago… Fixed targets Relative, self-adjusting targets Target: absolute ROCE in % (here: 15%) Target: relative ROCE in % (to market) Plan Actual Target Actual Comparison: Comparison: Market-Actual Plan-Actual Most Target: „ROCE Most important in % better important Market competitor than market Market competitor (25%) (28%) average” (25%) (28%) Actual Actual Plan (21%) (21%) (15%) [independent [expected from expected market Ø: 13%] market Ø] • Interpretation within the plan-actual- • Interpretation within actual-actual compa- comparison: Plan was outperformed by 6 rison: Performance was 4 percentage points percentage points > positive interpretation below competition! > negative interpretation • Better ROCE of the market average and the • Absolute assumptions at the moment of most important competitor remain unnoticed! planning don´t matter. • Targets always remain updated and relevant! Source: Niels Pfläging Excellence Conference – Tehran/Iran 32 © BBTN – All rights reserved
Excellence Conference – Tehran/Iran 33 © BBTN – All rights reserved
The problem with “incentives”: How traditional management systematically forces people to cheat Bonus Variable Bonus Common practice: hurdle area limit “Ceiling” „Pay for performance“ compensation Salary/ Reduction Maximization Reduction incentive: profile with fixed bonus incentive: Lower incentive: Anticipate postpone results to performance contract: result even more results next period Creates maniuplation incentive in any situation! Base salary 80% 100%: 120% Performance as % of target target of target of target realization Linear compensation curve without breaks: A better model: Result variable compensation becomes oriented compensation decoupled from targets profile with relative Salary/ Free from performance bonus incentive to manipulate contracts: No incentive to manipulation. Actual Actual Actual Performance in Source: Michael Jensen result #1 result #2 result #3 relative evaluation Excellence Conference – Tehran/Iran 34 © BBTN – All rights reserved
General principles for designing compensation systems in Beyond Budgeting organizations 1. Pay the person – not the position. Abolish salary bandwiths. 2. Reward results (ideally, relative to external benchmarks), not target realization or actuals compared to plans. Abolish all links between targets and money. 3. Apply group- or team-based variable compensation, e.g. participation in the overall financial result of the firm, not individual bonuses. 4. Design simple variable compensation systems – eliminate complexities, which will lead to manipulation. 5. Compensate long-term value creation – not short-term performance. 6. Only use financial performace indicators in compensation systems – not intermediate indicators which are often hard to quantify or measure (such as quality or customer satisfaction). 7. Include all people in the variable compensation system (turning the system fair and inclusive) – not only an “elite“. 8. Use the language of participation in results - not the philosophy of “incentives“. Organizations can free themselves from conventional forms of All employees should earn a “pay for performance”, share of the financial success. through simple and more transparent Restrain from the idea of compensation systems. Excellence Conference – Tehran/Iran them“! “motivating 35 © BBTN – All rights reserved
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Coherence is the critical issue Excellence Conference – Tehran/Iran 37 © BBTN – All rights reserved
The power of visionary leadership: dm-drogerie markt, transformed during the 1990s f( D x V x S )> R The results: • More successful than its competitors in all relevant performance indicators. • One of the most respected companies in Germany. Strong organic growth. • Almost without hierarchy, since the late 1990s. “Branches rule“, leadership happens “by dialogue“. • Doesn´t manage “cost” or “plans”, but shows employees how value creation flows through the organization, through internal value creation accounting system D = Dissatisfaction V = Vision S = Strategy/Steps R = Resistance Excellence Conference – Tehran/Iran 38 © BBTN – All rights reserved
The best-led technology firm in the world? Semco, from Brazil – transformed at the beginning of the 1980s • Consistent performance during the last decades, inspite of deep crisises in Brazilian economy • Transformed after deep crises in the early 80s, 3.000 employees today • “The fastest-growing company in Latin America” (strategy+business) • One of the most admired companies in Brazil. • “The most democratic company in the world” (HBR) • Lowest staff turnover among competitors • All people participate in their business unit results • Employees choose their own bosses and set their own salaries • No formality – minimum of meetings, memos and approvals. Everybody knows the numbers. What they don´t need at Semco! • Fixed work hours and time control • Org charts • “Strategic plans” • HR department • Mission statement • Rigid plans and fixed targets • Obligation to participate in meetings • Fixed work places • Job and budget cuts • Conflict with syndicates/unions • ... Source: e.g. Ricardo Semler, „The Seven-Day Weekend“, 2004 Excellence Conference – Tehran/Iran 39 © BBTN – All rights reserved
are you “It’s not because it’s difficult that we don’t dare to do it: it seems difficult because we don’t dare to do it.” Seneca, Roman philosopher and statesman, 4BC – 65AD Excellence Conference – Tehran/Iran 40 40 © BBTN – All rights reserved
Principles: Leading profound, transformational change Applying a fitting change model is key - the BBTN’s Double Helix Transformation Framework is tailored to this challenge. 3. Beginning Organizational Individual change process change process 2. Neutral Zone 1. 2. 3. 4. 5. 6. 7. 8. Create a Pull Develop Communi- Empower Produce Don't Create a sense of together a change cate for all others short-term let up! new urgency guiding vision and understan- to act gains culture coalition strategy ding and buy-in References 1. Ending Download the BBTN white papers on www.bbtn.org! Excellence Conference – Tehran/Iran 41 © BBTN – All rights reserved
Now, it is time for transforming your organization – by closing the gaps A typical company – results from the BBRT online diagnostic Table 1: The case for change Problems Problems Vision Vision Practice Practice Close Close the gaps! the gaps! Excellence Conference – Tehran/Iran 42 © BBTN – All rights reserved
What you can do now – four options. 1. You didn´t like Beyond Budgeting, and think this isn´t really relevant for you! • That´s ok. We believe, however, that all traditionally managed organizations will at some point have to adopt the new model. Because market forces and human nature will ever more strongly put your organization under stress and make transformation a must. 2. You like the Beyond Budgeting idea a lot, but you didn´t like the speaker! • That´s quite a common phenomenon. Sometimes the chemistry just doesn´t work! Talk with the speaker about meeting another BBTN director, and organize a workshop with that other director. 3. You liked what you heard, but feel you need to know more to start acting on it! • Try additional information sources on Beyond Budgeting, like www.bbtn.org, or the Beyond Budgeting channel on Youtube, or our books and DVDs, or the online diagnostic on www.beyondbudgeting.org. Ask the speaker for additional resources and suggestions! We will gladly assist you. • Talk with the speaker about joining a “BBTN Master Course“, or book our coaching program “Beyond Budgeting On The Fly!“ 4. You liked what you heard, feel sufficiently informed, and want to make the next step towards transformation rightaway! • Talk with the speaker about scheduling an in-company workshop at your firm. Excellence Conference – Tehran/Iran 43 © BBTN – All rights reserved
Peter Drucker Excellence Conference – Tehran/Iran 44 44 © BBTN – All rights reserved
beyond Make it real! budgeting > transformation network. BBTN: www.bbtn.org Niels Pflaeging Gebhard Borck BBTN & MetaManagement Group BBTN & gberatung Al. Santos 1.991 Fritz-Neuert-Str. 13a 01419-002 São Paulo – SP, Brazil 75181 Pforzheim - Germany email@example.com firstname.lastname@example.org Skype: npflaeging Skype: gborck www.metamanagementgroup.com www.gberatung.de Xing forum: www.xing.com/net/beyondbudgeting Get in touch with us for more information about BBTN membership and about leading transformation, or ask us for a workshop proposal.
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